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Germany Is On A Roll Downhill

November 07, 1993

International Business

GERMANY IS ON A ROLL--DOWNHILL

For months, the German government has been assuring citizens that the recession gripping the nation was ending. But the confident talk has stopped. In late October, Germans were buffeted by a string of frightening reports of mounting job layoffs, falling output, and declining consumer spending. That forced a chastened Chancellor Helmut Kohl to admit the obvious: The bottom is still not in sight.

The darkening economy finally seems to be prompting the normally cautious Bundesbank to shift gears. On Oct. 21, in a surprise move, the central bank cut its key discount rate a half-point, to 5.75%. And some economists say the rate could fall to 4% by late 1994, a drop that could weaken the German mark and thus boost exports. "There's a break in the Bundesbank's monetary policy," says Thomas Mayer, Goldman, Sach & Co.'s economist in Frankfurt. "Inflation dangers are deemphasized, and worries about the economy are emphasized."

For its economy to turn around, Germany needs to be a more competitive exporter. But the strong mark has priced German goods out of markets. New Bundesbank President Hans Tietmeyer now admits he's worried about the effects of the strong mark, an indication the bank will be less eager to keep the mark high to combat inflation.

BLEAK OUTLOOK. A weaker mark no doubt will help industry. But it won't be enough to avert more corporate downsizing and sharp cuts in the nation's extravagant social welfare system, which Kohl slams as a "leisure park."

For Kohl and his ruling Christian Democrats, the bleak outlook spells political trouble ahead. The Chancellor concedes that the economy in western Germany will be moribund at least until mid-1994, just months before the November Bundestag elections. Kohl already is out of favor with nearly two-thirds of voters in one recent survey, and his disapproval rating is bound to rise as the jobless rate--now 8.6%--keeps going up.

The most dramatic job losses are occurring at Volkswagen, Europe's biggest carmaker. It announced on Oct. 25 that it will go to a four-day workweek next year to cut costs--a move that signifies another crack in Germany's social pact, as unions are forced to make unprecedented concessions. VW's new cutback follows an agreement with its unions to eliminate 15,000 jobs.

As an aggressive cost-cutter, VW is becoming something of a trendsetter: It has been demanding lower prices from suppliers, and other auto makers are following its example. So are other industries, from textiles to aerospace.

Of course, Germany's neighbors also are eyeing export growth to boost their economies, and many of them have an edge in the form of depreciated currencies. That's why a weaker mark may be inevitable if Germany is to get back on its feet.

When Germany's veteran leader sounds worried, when its top auto maker slashes jobs, and when its rigid central bank even hints that the vaunted German mark might have to come down a peg, you know the economy's in bad shape. But if Germany doesn't swallow its pride and make some drastic changes, better times will be a long time in coming.John Templeman in Bonn, with Bill Javetski in Paris